Your First Pay Check
Learning Goals/Objectives:
• Explain the difference between gross and net pay.
• Explain how tax withholding impacts net pay
• Identify at least four deductions from gross pay.
Overview:
Oh boy, you have found a job at XYZ Manufacturing Company paying $10.50 per hour. You are in a training program for the first year. After one year, you can expect a significant increase in your hourly rate. The work is not the most fun or the cleanest, but it is well above the minimum wage and the hours are regular, 8:00 am to 5:00 pm, with one hour for lunch. Any overtime work in excess of 40 hours in one week pays time and a half - $15.75 per hour.
At $10.50 per hour, your weekly earnings will be at least $420. You may get some overtime hours, once-in-a-while. This week you worked two hours of overtime to earn an additional $31.50. Your gross (total) pay for the week is $451.50.
What can you do with $451.50? Lots of things. A day later, you get your first payroll check. You eagerly open it and read the bad news. $451.50 has shrunk to $339.31. Where did the other $112.19 go? What is FICA, anyway? Do you really have to worry about Medicare?
One of the first unpleasant lessons a new worker must learn, besides the fact that you actually do have to work, is that employees pay personal income taxes to the federal government, the State of Ohio, and, if authorized, to your city or school district. George’s city levies a flat tax of 1%, the maximum allowed without authorization by the city’s voters.
As you get older or change jobs, the number of deductions from your paycheck may change. Some employers offer benefits that you can pay for through payroll deductions.
Activities:
1. Introduce the lesson by reading the introduction. Ask: How does $451 become $339?
2. Distribute Handout 15-1, George Jones’ First Pay Check.
3. Review the amounts of gross pay, deductions and net pay.
4. Explain the deductions on the pay check using Visual/Handout 15-2, Paycheck Definitions.
Some Basic Paycheck Definitions
Gross pay: The amount you earn in a pay period (# hours x wage rate).
Net pay: The amount you receive after deductions for taxes and other purposes.
Income Tax: A tax on personal income. Income taxes can be levied at the federal, state and/or local level.
Federal Income Tax Withholding. Federal income tax withholding is required for all employees. The percentage withheld depends on the estimated income and information you supplied on a W-4 Withholding form. Federal tax rates range from 15 percent to 35 percent (2010). Note: Withholding and tax rates are subject to change from year to year by Congress.
IRS Resources: Module 1: Payroll Taxes and Federal Income Tax Withholding
Ohio State Income Tax Withholding. Ohio law requires withholding for personal income taxes of 0.65 % for income of $1 to $80 per month to 8.075 % for income in excess of $8,333 per month.
Ohio Municipal Income Tax Withholding. Ohio law allows municipalities to collect local income taxes. A municipality may levy a tax of up to 1 percent without voter approval. Local voters can authorize a tax rate of up to 2.85%. This tax is levied at a flat rate for all residents. Most Ohio municipalities levy a rate of 1%.
Withholding: Amounts deducted from gross pay for taxes, Social Security, Medicare, and/or some required or optional benefits.
FICA: Federal Insurance Contributions Act. A required “contribution” toward Social Security retirement or disability income eligibility (Old-Age, Survivors, and Disability Insurance.)
The employee tax rate for Social Security is 6.2%.
The employer tax rate for Social Security is also 6.2%.
The wage base limit for year 2009 is $106,800. (No withholding above this level.)
Medicare: A required “contribution” toward Medicare and Medicaid retirement healthcare eligibility.
The employee tax rate for Medicare is 1.45%.
The employer tax rate for Medicare tax is 1.45%.
There is no wage base limit for Medicare tax.
Why Pay Taxes?
Show with the IRS online slide show on “Your Role as a Taxpayer.’ http://www.irs.gov/app/understandingTaxes/whys/thm01/les01/media/ss_thm01.pdf
Discuss briefly about the meaning of each slide. For instance, slide #7 is where federal tax revenues are spent – the federal budget. Students should be able to identify the ways they benefit from each category of spending – directly or indirectly.
Resources: Lesson 1: Why Pay Taxes?
Lesson 3: The Taxpayers Responsibilities
Lesson 4: The Taxpayers Rights
Introduce the primary way federal income taxes are collected through withholding from payrolls.
Resources: Lesson 2: Your First Job
Introduce the topic of a tax base using the IRS “Understanding Taxes” Theme 4 Slide Show, “What is Taxed and Why?” http://www.irs.gov/app/understandingTaxes/whys/thm04/les01/media/ss_thm04.pdf
Federal Income Tax Withholding. Federal income tax withholding is required for all employees. The percentage withheld depends on the estimated income and information you supplied on a W-4 Withholding form. Federal tax rates range from 15 percent to 35 percent (2009). Note: Withholding and tax rates are subject to change from year to year by Congress.
Resources: Module 1: Payroll Taxes and Federal Income Tax Withholding
Ohio State Income Tax Withholding. Ohio law requires withholding for personal income taxes of 0.65 % for income of $1 to $80 per month to 8.075 % for income in excess of $8,333 per month.
Ohio Municipal Income Tax Withholding. Ohio law allows municipalities to collect local income taxes. A municipality may levy a tax of up to 1 percent without voter approval. Local voters can authorize a tax rate of up to 2.85%. This tax is levied at a flat rate for all residents. Most Ohio municipalities levy a rate of 1%.
Other Withholding
Social Security, or “Old-Age, Survivors, and Disability Insurance (OASDI) program, is a social insurance program funded by payroll taxes referred to as Federal Insurance Contributions Act (FICA). Employers and employees are required to contribute to Social Security through tax withholding. Social security provides benefits for retirement, disability, and death, benefits which may also provides through private pension plans.
Social security taxes are withheld each pay date. The employer is responsible for paying the social security taxes due. For each year a FICA contribution is assessed, the employee receives credit toward retirement benefits from the Social Security Administration (SSA). In addition to Social Security, Medicare taxes on the employer and the employee are also withheld. The total FICA withholding is comprised of Medicare and Social Security. Medicare provides retirees with health benefits.
Some categories of workers who are exempt from paying Social Security taxes, including state or local government workers who are participating in an alternative retirement system, college students employed under federal work-study programs, postdoctoral researchers, and teaching assistants or research assistants. Under some circumstances, ministers or individuals providing religious services are not subject to FICA withholding.
FICA/Social Security and Medicare Withholding (2009)
The employee tax rate for Social Security is 6.2%.
The employer tax rate for Social Security is also 6.2%.
The wage base limit for year 2009 is $106,800. (No withholding above this level.)
The employee tax rate for Medicare is 1.45%.
The employer tax rate for Medicare tax is 1.45%.
There is no wage base limit for Medicare tax.
Source: Internal Revenue Service, URL: http://www.irs.gov/
Classroom Lesson: Lesson 4: The Social Security Act of 1935
Employee Benefits. As a condition of employment, individuals may be subject to certain expenses that are deducted from gross pay. These may include meals, employee purchases deducted from pay or benefits such as educational assistance, parking, child care, or company automobiles. Some benefits are considered taxable income and some are not.
Health Insurance. An employer may pay for some portion of an employee’s health insurance coverage. Some employers will pay for all of the cost. Others will pay a portion and the employee will pay the remaining cost. Still other employers will pay for all or some of the cost of dental care insurance, vision care insurance, or long-term disability insurance.
Retirement. In addition to Social Security withholding, employees may have an option or be required to participate in an employer-sponsored retirement plan. These plans will usually include an employee contribution and, possibly, a matching contribution from the employer. In addition to retirement plans, many employees are eligible to participate in IRA, 401K, or 403B Plans, which are private tax-sheltered savings plans. These can often be deducted from gross income prior to taxes being determined.
Union Dues or Professional Associations. You may choose or be required to join a union or professional organization at your place of employment or in your professional field. The dues can often be deducted automatically from your paycheck.
Other Employee Benefits. Many employers will offer benefits such as childcare, education payments, parking, special clothing or discounted purchases. These can often be deducted from the paycheck. Some benefits may be provided free of chare, but can increase the taxable income amount.
Teacher Note: To determine the deductions and net pay for pay rates and time periods, try this web site: URL: http://www.paycheckcity.com/NetPayCalc/netpaycalculator.asp.
Income Tax Rates
Explain that withholding is an estimate of the taxes that will be paid. This provides a “pay as you go” system to provide government revenues throughout the year. The actual amount of an individual’s taxes depends on multiple factors – including allowable deductions, exemptions, credits, etc.
Federal personal income tax rates for individual filers range from 10 percent for taxable incomes of $0 to $8,350 to 35 percent for taxable income over $372,950.
Resource: Federal Personal Income Tax (2009) Tables: http://www.irs.gov/pub/irs-pdf/i1040tt.pdf Note: Scroll down to the last page of this section for an overview of tax rates.
Ohio personal income tax rates range from .618 percent (people with taxable income of $0 to 500) to 6.24 percent (for taxable income over $100,000).
Resource: Ohio Personal Income Tax (2009) Tables: http://tax.ohio.gov/documents/forms/ohio_individual/individual/2008/PIT_IT1040_Instructions.pdf Note: Scroll down to page 36 of the instructions for an overview of Ohio personal income tax rates.
Use Exhibit #1, Mary Smith’s First Pay Check to illustrate how withholding may impact gross pay. The exhibit is included at the end of this section.
For additional details and activities on topics related to tax return preparation, payment and tax form filing, use these IRS “Understanding Taxes” lessons:
Module 8: Claiming Child Tax Credit and Additional Child Tax Credit
Module 9: Tax Credit for Child and Dependent Care Expenses
Module 11: Earned Income Credit
Module 12: Refund, Amount Due, and Record Keeping
Module 13: Electronic Tax Return Preparation and Transmission
Module 14: Self-Employment Income and the Self-Employment Tax
Other Tax Topics
Fairness in Taxes
Lesson 1: How to Measure Fairness
Additional topics related to the broad concept of taxes and tax issues are included in Theme 4, “What is Taxed and Why” and Theme 5, Impact of Taxes.”
Lesson 1: Federal/State/Local Taxes
Lesson 2: Taxes in a Market Economy
Lesson 4: Direct and Indirect Taxes
Ohio Sales Taxes
For information about Ohio sales taxes, go to the Ohio Department of Taxation web page “FAQs - Sales & Use Tax: Sales Tax” http://www.tax.ohio.gov/faqs/Sales/sales.stm
Theme 5: Impact of Taxes
Materials:
Handout 15-1: George Jones’ First Pay Check (on download)
Handout 15-2: Paycheck Definitions
Gross pay: The amount you earn in a pay period (# hours x wage rate).
Net pay: The amount you receive after deductions for taxes and other purposes.
Income Tax: A tax on personal income. Income taxes can be levied at the federal, state and/or local level.
Federal Income Tax Withholding. Federal income tax withholding is required for all employees. The percentage withheld depends on the estimated income and information you supplied on a W-4 Withholding form. Federal tax rates range from 15 percent to 35 percent (2010). Note: Withholding and tax rates are subject to change from year to year by Congress.
Ohio State Income Tax Withholding. Ohio law requires withholding for personal income taxes of 0.65 % for income of $1 to $80 per month to 8.075 % for income in excess of $8,333 per month.
Ohio Municipal Income Tax Withholding. Ohio law allows municipalities to collect local income taxes. A municipality may levy a tax of up to 1 percent without voter approval. Local voters can authorize a tax rate of up to 2.85%. This tax is levied at a flat rate for all residents. Most Ohio municipalities levy a rate of 1%.
Withholding: Amounts deducted from gross pay for taxes, Social Security, Medicare, and/or some required or optional benefits.
FICA: Federal Insurance Contributions Act. A required “contribution” toward Social Security retirement or disability income eligibility (Old-Age, Survivors, and Disability Insurance.)
The employee tax rate for Social Security is 6.2%.
The employer tax rate for Social Security is also 6.2%.
The wage base limit for year 2009 is $106,800. (No withholding above this level.)
Medicare: A required “contribution” toward Medicare and Medicaid retirement healthcare eligibility.
The employee tax rate for Medicare is 1.45%.
The employer tax rate for Medicare tax is 1.45%.
There is no wage base limit for Medicare tax.
Federal withholding: 10 % of the first $401 (weekly) $40.10
Plus 15% of the amount over $401 (up to $1387) $7.58
Total Federal income tax withholding $47.68
Ohio state withholding: 4.56% of first $384.50 (gross minus $25) $17.15
Plus 3.094% of amount over $384.50 $1.30
Total state income tax withholding $18.45
City/Local withholding: 1% $4.52
This tax rate can be up to 3%, if authorized by the city’s voters)
FICA (Social Security): 6.2% (employer also pays 6.2%) $27.99
Medicare: 1.45% (employer also pays 1.45%) $5.55
George also pays $4.00 per week for clean work uniforms. $8.00
(This is optional, but is easier and cheaper than doing it himself.)
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